Lord Chidgey: My Lords, I thank the noble Baroness for that reply. With reports of food riots spreading throughout Guinea and armed conflict taking place between rival groups that had wrongly heard that the president had died—in fact, President Conté's term of office is now likely to end in a military takeover—is that not a real sign of increasing instability in the region, which threatens the peacemaking efforts of the United Kingdom in neighbouring Sierra Leone and Liberia? Is there not now an urgent and critical need to provide substantial help to civic society in Guinea to prevent that country from slipping down the road to military rule?

Baroness Amos: My Lords, the noble Lord is right that Guinea is a fragile and autocratic state. It is very important to peace and stability in the Mano river region, which includes Sierra Leone and Liberia, as the noble Lord said. We have seen the democratic elections and the election of President Johnson-Sirleaf in Liberia and hope that that will assist with stability. Of course, Côte d'Ivoire in the Mano river basin wider region is going through a difficult time. The noble Lord is right to say that support to civil society in Guinea remains very important. We also have to work to ensure that there is a peaceful transition through democratic processes in Guinea, and we are working with our partners to ensure that.

Lord Renton of Mount Harry: My Lords, I remind noble Lords of my interest as chairman of the South Downs Joint Committee. I congratulate the Minister on his new appointment. As he is a well known toughie, I am not surprised to find him at Defra, considering that four of the other five Ministers have gone. The previous Secretary of State must be lucky to find herself at the Foreign Office.
	That said, I am delighted to hear the Minister's announcement today. How does he propose to handle this in the future? Let us agree that the single farm payments have been a horrendous shambles. How can the system now be made simpler for the farmers? Is the noble Lord aware that the applications for 2006 must be in in five days' time? Many are unsure of their entitlements. Must the Minister not ensure that the shambles of the past 12 months does not happen again?

Lord Rooker: My Lords, I thank the noble Lord for his welcome. We deeply regret what has happened and the massive distress that has been caused to farmers. Eighty-five per cent of the money will be dispersed, but that will not reach 85 per cent of the applicants. There are still applicants who have had no money. We have to move quickly to make sure that they receive it. We also have to learn the lessons of what has happened, which has been unique to England. It has not been a difficulty in Scotland or Wales or in Northern Ireland, although I claim no credit for that because the work was well under way before I arrived. However, there are lessons to be learnt on the design of forms and the way that the IT works. There will be problems, and it is not a given that next year will be without difficulties. However, we will move heaven and earth to make sure that we limit them as much as possible.
	As regards the closing date for 2006 forms, we will extend the deadline to 31 May without penalties, but it is in the interests of farmers to get those forms in as soon as possible.

Lord Livsey of Talgarth: My Lords, will the Minister accept my congratulations on receiving the ministerial post? He was a MAFF Minister, and I have confidence that he will try to sort things out. Will he tell the House how much interest is due on single farm payments and when it will be paid? The payments were due to be paid by 31 March, and many farmers have now waited more than six weeks for them. Given the record of stand-apart agencies—for example, the CSA—will he review whether the RPA is up to its job?

The Lord Bishop of Exeter: My Lords, is the Minister aware of the impact of the delays in making the payments not merely on agriculture but on the wider rural economy? Do the Government recognise that a medium livestock firm provides employment and income for around 60 rural businesses and that a dairy firm typically depends upon 27 suppliers? To what extent do the Government recognise that those firms are also incurring debt and facing the prospect of losing their livelihood? What plans do they have to address the latest distress in the rural economy?

Lord Rooker: My Lords, every issue that arises affects those down the chain in rural economy. That issue crossed my desk when I was previously in MAFF. There is real difficulty when the recipient of what is, in effect, public money paid through the common agricultural policy does not get it and so cannot spend it in the local economy. That is a real problem, and there is no easy answer. However, I am more than happy to discuss it with those concerned in rural affairs—most Members of this House, including myself—and the farming industry.

The Earl of Erroll: My Lords, would the Minister consider back-dating entry-level scheme payments? Farmers have not been able to enter because the maps were not ready. They have expended money on seeds and cultivations in order to put in place the environmental measures but have been unable to receive payment for them for the past year.

Lord Rooker: My Lords, I am grateful for the opening remarks of the noble Baroness, and I look forward to working with her on these important issues.
	On the latter point, frankly, I am in no position to answer. I have just flown in from Northern Ireland, and I am going back there because this happens to be its biggest agricultural food week with the Balmoral show. I have promised to be there tomorrow, and everyone has agreed that I should be. I have been in Defra for half an hour, and I will be there for another hour. I have worked more than half an hour today, but I am in no position to answer. Mr Addison obviously was a Defra official. It was never planned that he would be long-term on the operation. Together with the people in the Rural Payments Agency—I pay tribute to them—he has obviously masterminded a massive turnaround in a short time in the past few weeks.
	As for the future, obviously there is a pro tem appointment, as the noble Baroness says. The desire now is to get the system clear so that we have confidence in it. We can then look at the situation in the Rural Payments Agency before we make permanent long-term appointments.

Baroness Fookes: asked Her Majesty's Government:
	Whether they will re-designate the term "brownfield site" so that it excludes gardens.

Baroness Andrews: My Lords, I am pleased to report that, because we have prioritised brownfield sites precisely to protect the green belt and the openness of our countryside, we are exceeding our target, which was 60 per cent We are now building on 72 per cent brownfield and show signs of going higher than that. When we look at where best to develop, we must keep that as our priority, and that is working.

Lord Brabazon of Tara: My Lords, I had hoped that we would not get into the nitty-gritty of this list because, as the noble Lord, Lord Geddes, says, if one does so one can get into problems. This list is reproduced from the existing code; that is the point about it. I draw your Lordships' attention to the point contained in paragraph 4, which states that the registrar will be able to advise, and the registrar's word is taken now as good.

Lord Sainsbury of Turville: moved Amendment No. 170:
	Page 150, line 22, leave out subsection (4).

Lord Sainsbury of Turville: My Lords, in moving Amendment No. 170, I shall also speak to Amendments Nos. 171 to 173, 175 to 179, and 183 to 187. These amendments are concerned with Part 14 of the Bill—political donations. Although they address a number of different issues, I will speak to them together for efficiency because, apart from one minor correction, they address concerns that have been raised by noble Lords in Committee.
	The first couple of amendments, those to Clauses 341 and 343, simply correct a drafting inconsistency between the definitions of political expenditure that appear in these clauses. I am grateful to the noble Lord, Lord Razzall, for highlighting this inconsistency in Committee.
	I turn now to the proposed amendment to Clause 342. This clause refers to the definition of "political donation" set out in the Political Parties, Elections and Referendums Act 2000. Changes to this definition have recently been agreed by way of amendments to the Electoral Administration Bill in this House relating to loans made to political parties. The amendment to Clause 342 ensures that the scope of this provision is not altered by the changes to the Political Parties, Elections and Referendums Act 2000 made by the Electoral Administration Bill. In other words, Part 14 of this Bill will continue to apply only to political donations, which are defined as including loans at a non-commercial rate. It remains the case that Part 14 does not apply to loans at a commercial rate.
	The next set of amendments in this group concerns Clause 345. The amendments respond to an issue raised by the noble Lords, Lord Hodgson and Lord Razzall, in Committee regarding whether it should be necessary for a holding company to name each of its subsidiaries when passing a resolution that gives approval for a political donation. I accept that the requirements of this clause should not be overly restrictive when a holding company passes a resolution in relation to its subsidiaries. Accordingly, Amendments Nos. 175 to 179 make it clear that a holding company does not need to refer to each of its subsidiaries in the circumstances specified.
	The amendments to Clause 348 are concerned with the liability of directors of a holding company in the case of unauthorised political expenditure or an unauthorised political donation by a subsidiary. I hope that it will be helpful to noble Lords, and for the record, if I describe the mechanics of the amendment in a little detail, as I know that this was a point of particular concern during the discussions in Committee, and we believe that these amendments go a long way towards addressing it.
	First, Amendments Nos. 183 and 184 adjust the terminology, replacing "responsible directors" with "directors in default". This makes it clearer, for the avoidance of doubt, that a director may apply for relief under Clause 769, which refers to proceedings for default. Secondly, Amendment No. 185 addresses the particular concern that the directors of a holding company could be liable for a political donation made by a subsidiary over which they have no control or of which they have no knowledge.
	It is worth emphasising at this point that the liability of such a director of a holding company is already limited by the definition of "subsidiary" in Section 736 of the 1985 Act. Essentially, that section defines a subsidiary as being a company controlled by a holding company by virtue of the fact that the holding company controls a majority of its voting rights or has the right to appoint or remove a majority of its board of directors. Therefore, in many cases the directors of a holding company will control the voting rights that the subsidiary needs to pass a resolution approving a political donation.
	We recognise that there may be cases where directors of a holding company are not aware of a political donation made by a subsidiary or are powerless to prevent it. The amendment provides that the directors of a holding company will be liable only if they have failed to take all reasonable steps to prevent the donation from being made by the subsidiary. Accordingly, the directors of the holding company will not be liable for an unauthorised political donation by a subsidiary if, having taken all reasonable steps, they are unaware of the donation or are powerless to prevent it. However, if, for example, the directors of a holding company use the controlling voting rights that they have in a subsidiary to pass a resolution authorising the subsidiary to make a political donation without an authorising resolution from the members of the holding company, then the directors of the holding company would be liable. I note that Amendment No. 186, tabled by the noble Lords, Lord Sharman and Lord Razzall, addresses the same point. In the light of my explanation, I hope that they will be able to withdraw it.
	I turn finally in this group to the amendment to Clause 356, Amendment No. 187. This is a minor correction to the drafting. I beg to move.

Lord Sharman: My Lords, as the noble Lord, Lord McKenzie, has said, I have added my name to Amendment No. 186 in this group. I begin by acknowledging the very significant steps taken by the Government to meet our concerns in this difficult area. As the noble Lord, Lord McKenzie, said, Amendments Nos. 186 and 185 address the same issue. There is, however, a subtle difference between the two. I will not move Amendment No. 186, but I ask the Government and the Bill team to take on board the issue of knowledge. Government Amendment No. 185 does not address the issue of whether or not the directors had knowledge of the illegal donation, but Amendment No. 186 takes this into account by referring to them having the knowledge and whether or not they did anything about it. I shall not press the amendment at this stage, but I would like the Government to take that on board.

Lord Hodgson of Astley Abbotts: My Lords, in moving Amendment No. 174, I shall speak also to Amendments Nos. 180 and 181. The amendments are to Clauses 344, 345 and 346, which concern the authorisation required for donations or expenditure under Part 14 of the Bill in connection with political activities, and relate to the procedure which needs to be followed by companies where they wish to make such donations or incur such expenditure.
	The Bill currently provides that political donations or expenditure must be authorised by resolution of all the members of the company. The amendments we have tabled would enable authorisation by a resolution of the board of directors. This would save the time and expense required to seek the permission of all the members.
	Much of our debate yesterday centred on the responsibilities and liabilities of directors, a matter addressed by my noble friend Lord Freeman. The new codification of duties, which the Government achieved after a Division yesterday, imposes new statutory responsibilities on directors and the new statutory derivative claim which expand the grounds upon which members can claim against directors on behalf of the company. All these new obligations appear to be designed to ensure that directors follow the correct procedures and take into consideration the correct influences when making decisions for the company. They will also allow for greater scrutiny of these processes and greater activism to chase up errant boards and errant directors.
	So, bearing that in mind, we are unconvinced by the comments of the noble Lord, Lord McKenzie, in Grand Committee that such political donations,
	"might be seen to reflect the director's personal viewpoint rather than the interests of the company".
	He went on to state:
	"That is the nuisance that we are seeking to avoid, and the requirement for member authorisation is needed to achieve that".
	If that really is the case, then what purposes do the newly codified directors' duties achieve? It is strange that the Government should have so little confidence already in the effectiveness of the newly codified duties that they have fought so hard to introduce to this Bill. Therefore, if the Government have faith in their new reforms to directors' duties, we see no reason why it should not be appropriate for boards of directors to authorise political donations and expenditure.
	The noble Lord, Lord McKenzie, also spoke about what he perceives as the parity between trade unions and companies when it comes to donations. He said:
	"It is also right that trades unions have to go to their members to be able to set up a political front".—[Official Report, 1/3/06; GC 147.]
	I do not think he meant "front", but that is what is recorded in Hansard—I think he meant "fund". This is somewhat misleading; as I understand it, trades unions merely ballot their members over the setting up of a political fund once, and then every 10 years subsequently to maintain the fund. A company, however, will be required to do so every time it makes a donation. To compare the two, and to say that all is balanced, strains the bounds of credibility.
	Our amendments seek to redress the balance a little. Companies would still be able to make donations or expenditure of a political nature where it is in the best interests of the company. In fact, under these amendments, it would probably have to be even more clearly in the interests of the company as the directors have a duty to so act while the members, acting in their personal capacity, have no such duty and may well be swayed by their own political inclinations, despite any benefit the company in which they are invested may obtain. Companies would be able to do so with a minimum of administrative effort and expense, unlike the proposed mechanism in the Bill. Shareholders would retain their ability to be in overall control through the various checks and balances that already regulate directors' conduct and those that the Bill introduces or amends. I beg to move.

Lord McKenzie of Luton: My Lords, I fear that I shall disappoint the noble Lord by singing a song he has heard before. We agree, of course, that directors should comply with their general duties to the company in everything that they do as a director. In a perfect world, that would be sufficient. However, it would be unrealistic to overlook the fact that when it comes to political donations, the possibility of a conflict of interests is particularly acute and a requirement for shareholder consent is appropriate.
	Amendments Nos. 174 and 181 would remove the requirement for prior shareholder authorisation and, in doing so, would neuter the provisions entirely. In this context, we do not believe that Amendment No. 180, which draws an explicit link between the ability of a board to authorise a political donation and its general duties, provides anything more than window dressing.
	I do not think that there is very much to be gained by setting out in detail our reasoning for opposing the amendments as it simply boils down to a matter of principle. But it is worth noting that the requirement for member authorisation is hardly unique to this part of the Bill. For example, Chapter 4 of Part 10 details a number of transactions that require the approval of members.
	We believe the approach that we have adopted in this part provides business with sufficient flexibility to manage legitimate activities with the minimum of process overhead. To relax the restrictions in the manner proposed by the noble Lord would be a radical change that would undermine the entire raison d'être of this part and reverse the existing law. I need hardly remind noble Lords that the current law is based on the recommendations of the Committee on Standards in Public Life.
	I hope that the noble Lord, Lord Hodgson will recognise that on this point of principle we have no flexibility and does not feel it necessary to press the amendment.

Lord Hodgson of Astley Abbotts: My Lords, I am grateful to the Minister. As he said, the tune was, as I expected, slightly familiar. I notice that he fell back on the issue of conflicts of interest. That is a fair point but, if that were the case, it would be good if trades unions had to make a similar annual requirement to poll their members, ensuring that there was no conflict of interest on that side either. In the meantime, I beg leave to withdraw the amendment.

Lord Sainsbury of Turville: My Lords, in moving the amendment I shall speak also to the 61 other amendments which stand in my name in this group. I said during the debates on the business review and the operating and financial review in Grand Committee that we hoped to bring forward amendments to reflect the outcome of the Government's consultation on narrative reporting as soon as practicable. I am pleased that we have been able to do so in time for Report to give the House the opportunity for debate before the Bill passes to the other place.
	Our proposal on narrative reporting, which Amendment No. 196 will add to the requirements for the content of the business review, represents consistent and balanced policy in light of our recent consultations and discussions with interested parties. Our aim has always been to encourage meaningful, strategic, forward-looking information to assist shareholder engagement while avoiding disproportionate burdens on business, in line with our better regulation agenda.
	The Government have concluded that the additional burden imposed by the statutory OFR requirement is not justified in the light of the competitiveness of UK business. Amendments Nos. 200 to 202 and the consequential amendments will therefore remove the OFR provisions in the Bill. The proposed changes to the narrative reporting requirement will add value to the quality of the reporting without imposing unnecessary costs.
	As part of this package the Government will also clarify the position on liability for disclosures, both under the Companies Act and for implementation of the EU transparency obligations directive. To encourage open and meaningful reporting, it is necessary to provide certainty on the issue of liability. We expect shareholders to make full use of this further information. We want to achieve a proper balance between the ability of directors to report on their business in good faith and shareholder rights.
	The narrative reporting requirements have been streamlined so that the requirements for quoted companies are now more closely aligned to those for unquoted companies in the business review. Under the proposed new narrative reporting arrangements, all companies other than small companies will need to produce a business review as required by the EU accounts modernisation directive. The purpose of the review is to inform shareholders of the company and help them assess how the directors have performed their duty under Clause 156, which relates to duty to promote the success of the company.
	Quoted companies will need to ensure that, to the extent necessary to understand the development, performance or position of the company's business, their business review includes certain information relating to the main trends and factors which are likely to affect the business in the future and to environmental, employee, social and community matters, as set out in Clause 395(5).
	Where directors have nothing to report on environmental, employee or social and community matters, the review must say so. Auditors will continue to be required by Clause 487 to report on the consistency of the directors' report, including the business review, with the accounts, as is required by the EU directive, but there will be no additional requirements to check for inconsistency. This preserves the £30 million-pound saving made by repealing the requirement for an OFR under the Companies Act 1985. All companies will be exempted from disclosing in the business review information that is seriously prejudicial to the company's interests. That extends to all companies. The exemption previously only provided for quoted companies producing an OFR. This will also mean that companies would be exempt from any disclosure that would prejudice national security.
	There will also be no statutory reporting standards for the business review as there were for the OFR. It is important to emphasise that the new narrative reporting proposals seek to enhance the quality of the narrative reporting without imposing unnecessary burdens on companies. In bringing forward these new measures we listened carefully to the concerns and wishes expressed by a wide range of business groups, shareholders and other interested parties. We also paid careful regard to the remarks made by noble Lords in Committee, and considered them closely.
	I turn now to the amendments to the new clause tabled by the noble Baroness, Lady Noakes. I am grateful to her for tabling Amendment No. 197, as it gives me the opportunity to explain the Government's rationale behind specifying the purpose of the business review under the new subsection (2). Our reasons are twofold. First, specifying for whom the business review is intended is an important part of the package concerning liability. Specifying that the review is to inform members of a company is intended to make clear that the business review is designed for the benefit of members as a whole so that they may exercise their governance rights more effectively. It is not designed to help individuals decide on investment decisions, nor is it targeted at the wider public in the sense that they should be entitled to rely on it, although they may well read it. The effect of the provision is to limit directors' liability to the company only, and ensure that neither individual investors nor anyone else is entitled to sue. In effect, this has codified an aspect of the Caparo judgment. We consider that making that clear will facilitate open and meaningful reporting.
	Secondly, we want to make an express link between the business review and the directors' duties under Clause 156. That clause, as we discussed yesterday, embodies the concept of enlightened shareholder value. That is relevant to reporting on matters such as the environment and employees in the business review, which my noble friend Lord Clinton-Davis drew attention to yesterday. As we explained with regard to Clause 156, the Company Law Review concluded that the success of the company could only be promoted taking due account of such factors, which reflect wider expectation of responsible business behaviour. By making the link to directors' duties, it helps to make clear that those factors contribute to the success of the company for the benefit of members as a whole, and it is in that context that directors are being asked to report on them.
	Subsection (2) is a response to the view of stakeholders during the Government's recent consultation. Business and investor groups alike called on the Government to clarify the position on liability. As I said, specifying the purpose of the business review is one element of the package to limit directors' liability. The direct link to directors' duties was pressed for by a significant number of interest groups. They echoed the Company Law Review in seeing a clear and important link between enlightened shareholder value and narrative reporting. I therefore urge the noble Baroness to withdraw Amendment No. 197.
	I applaud the intention behind the noble Baroness's second amendment. The effect would be to relieve companies from the burden of having to copy out into the business review information required to comply with the review, if it is already included elsewhere in their annual accounts and reports. We agree entirely with that aim. However, we believe the amendment is not necessary. Cross-referencing to material included elsewhere is already allowed, and happens in practice. The Government's guidance on the business review makes clear that this is the case. We fear that making express provision in the Bill for cross-referencing would cast doubt on existing practice.
	I also reassure those with concerns about the validity of information for the business review that is included by cross-referencing. Any information that is included by reference to other materials elsewhere is subject to all the statutory requirements applied to the business review. That would include, for example, that the cross-referenced materials be subject to the same auditor's report requirements as the business review as part of the director's report, under Clause 487, and that all cross-referenced materials be circulated to every shareholder in the company and others entitled to receive the annual account or report, under Clause 404.
	I hope, in the light of this explanation and reassurance, that the noble Baroness will not press her amendment. I beg to move.

Viscount Bledisloe: My Lords, I should like to raise one point on Amendment No. 196, which appears to me—and I am sure that I am wrong—to contain one rather serious illogicality. It basically requires a business review, which is an objective review of how the company has done, how it is doing, and the extent to which it has had proper regard for employees, environmental matters, and so on. That is a report on how the company is doing. But subsection (2) of the amendment says that the purpose of the review is to inform members of the company how the directors have performed their duty.
	A report on how the company is doing may not in any way tell you how the directors are doing. A company may be doing very well because it has excellent managers, or because the economic trend has favoured it tremendously, or because its product has suddenly become very desirable for outside reasons. Although it is doing very well, the directors may have met three or four times a year for a quarter of an hour, nodded through the business in front of them without having read it, and then retired to a very good and perhaps rather over-refreshed lunch. The fact that you are told how the company is doing does not tell you at all how the directors are doing. Surely subsection (2) is an illogicality? While not asking the noble Lord to deal with the matter today, I ask him to take it away and consider whether subsection (2) really does logically fit, in the way that it is worded, with the rest of the amendment.

Lord Phillips of Sudbury: My Lords, I hesitate to make my first contribution to this mammoth debate at this stage, but one of the prices of running major legislation in the Moses Room as well as in this Chamber is that those who are engaged on other Bills are excluded from participation in mainstream Bills such as this, and I was heavily involved in the Identity Cards Bill.
	Having said that, I, too, am cheered by the extension that Amendment No. 196 makes to the Bill—in particular, subsection (5). That subsection seems to be completely new and to embrace many of the issues contained in Amendment No. 194B to be addressed by my noble friend Lady Northover in the next group. However, I have the sensation that if Amendment No. 196 is passed, Amendment No. 194B may fall, but no doubt the Deputy Speaker will comment on that.
	My questions to the Minister are twofold. First, the requirements of subsection (5) are confined to a quoted company, and in time it may be found that that is too restrictive. I believe that the majority of the British companies named in the OECD report on operations in the Democratic Republic of Congo were not publicly quoted companies. It might be interesting if the Minister would comment on that.
	My question concerns the formulation at the start of subsection (5), which says:
	"In the case of a quoted company the business review must, to the extent necessary for an understanding of the development, performance or position",
	and so on. It seems to me that the phrase "an understanding" is a bit limp. I would have hoped that we would be talking here of "a rounded understanding", "a comprehensive understanding" or even "an adequate or reasonable understanding". Without some qualifying objective, "an understanding" represents such a low hurdle that it is almost impossible to conceive how it will not be taken unless there is a complete ignorance of the factors mentioned in paragraph (b). Perhaps the Minister will comment on that, although I shall quite understand if he wants to do so outside the Chamber after the debate.
	The second point on which I ask him to enlighten us concerns the final three lines of subsection (5), which say:
	"If the review does not contain information of each kind mentioned in paragraph (b)(i), (ii) and (iii), it must state which of those kinds of information it does not contain".
	That is a slightly gnomic formulation. I wonder whether, if I understand it aright, it should not merely say that it does not contain that information but why it does not contain it. Again, it seems extraordinarily ineffectual to leave it at that.
	Finally, there is an issue which concerns the independent contractors of British companies abroad. I perfectly accept that the proposed new Clause 395 addresses the position of the company's employees, and that that includes the company's subsidiaries' employees, but it does not appear to cover independent contractors. In most third world countries where there is serious abuse of overseas workers, they make sure that they are not employees but so-called independent contractors, although under British law that might be an extremely doubtful arrangement. Under indigenous law, they will indeed not be employees.
	This morning, I had a message from Mr Saunders who is the company secretary and general counsel of Oxfam, who said that,
	"when some companies outsource parts of their business, they often try to outsource any responsibility for their social . . . impacts".
	He mentioned cases where women and men are forced to work under punishing conditions in factories to meet the demands of British company employers. The question is whether the formulation in Amendment No. 196 requires a reference to those circumstances. I see that there must be information about social community issues. The Minister may be in a position to assure me that that will be sufficient to bring the position of those so-called independent contractors within the purview of the directors' report.

Lord Sainsbury of Turville: My Lords, we have not yet got to that point. I am sure that when we do, the attempt will be to make that as intelligible as possible. The key point is that it would have to be circulated in the same way as other material. You could not simply refer to a document which people had not received.
	On the comments of the noble Viscount, Lord Bledisloe, I think he lives in a different world from the one that we live in. In the world in which I live, at least, there is thought to be a relationship between the managers, their performance and the performance of the company. That is rather important and fundamental to this whole Company Law Reform Bill. If we do not believe that, it is, frankly, not worth spending a lot of time on this Bill. That is the assumption. Of course, there will be cases where companies do well despite their directors' efforts. However, the fundamental principle of company law is that directors are responsible for the company and manage it. Speaking for most directors, the picture he paints of their meeting rarely and going off and having a nice lunch is really unfair. In the world we live in, directors bear a heavy responsibility, in many cases putting in long working hours because they believe passionately that their performance affects that of the company.

Lord Sainsbury of Turville: My Lords, the noble Baroness has tabled some interesting amendments that echo amendments tabled in Grand Committee, to which several Members of the House have spoken. The amendments would strengthen the requirements of the business review and reintroduce elements of the Operating and Financial Review. However, I fear that this would impose unduly onerous burdens on all companies, not only quoted ones. The OFR was originally a requirement for quoted companies only. No evidence from the Government's recent consultation on narrative reporting suggested that any requirements to report on specific information relating to the environment, employees, and social and community matters should apply to a different set of companies.
	We made it very clear yesterday in our discussion on Clause 156 that we are determined that the essential duties of directors should be clear, and we have made the link between that and the business review. The business review is therefore clearly positioned so that people can judge how well directors are doing against those duties. I think that it would be sheer folly to pile unrealistic and onerous reporting duties on them.
	On the point about contractors, many companies I know of have 500 or 600 contractors and others working for them in disparate relationships. The idea that directors are required to have some kind of responsibility not only to provide a good service but to have regard to the environment and all other policies is quite impossible. In any case, it is for those companies to answer for their responsibilities. What the amendments suggest is simply not feasible or practical. If we are going to make the business review work sensibly, we must be very clear about what is practical and sensible and not place too great a burden on companies.
	Amendment No. 194A, which would remove the words "where appropriate" from the beginning of subsection (4)(b) of Clause 395, would remove the directors' ability to judge whether it was appropriate to include analysis using non-financial key performance indicators in the business review. That would make the provision much more onerous than the EU accounts modernisation directive, and we do not think that that is justified. New Clause 395, in government Amendment No. 196, provides that, where directors of quoted companies do not consider certain information to be material, they must say so in the review. We think that that is the way in which to do it, because that will be a prompt to directors to consider such matters.
	Amendment No. 194B would require all companies to include analysis using key performance indicators on the impact of the company's policies and activities on the environment, on the communities they operate in, and on employees and other contractual arrangements, as well as the extent to which such policies have been successfully implemented. Elements of this are now incorporated into the new business review in Clause 395. But, again, we have included them for quoted companies only. We see no justification for imposing on other companies requirements over and beyond what the EU directive requires. That is not to say that we do not think other companies should be reporting less. We have rationalised the narrative reporting requirements in one place under new Clause 395. Although the information specified under subsection (5) is required of quoted companies, there is nothing to prevent other companies from providing this level of information, too. Indeed, we hope that they are encouraged to do so.
	Amendment No. 194C would remove the exemption for medium-sized companies having to disclose non-financial KPIs. The exemption is an option that the EU directive allows member states in implementing the business review requirements. Again, we see no justification for not granting this exemption in the UK. Not to do so could hinder the competitiveness of UK plc.
	We recognise that the CORE coalition, the TUC and some other interest groups called for all or some of the OFR provisions to be reinstated or inserted into the business review, as the noble Baroness's amendment seeks to do. However, some business organisations argued strongly against reintroducing the OFR reporting burdens. That is not to say that companies were against the OFR in itself. Quite the contrary: many companies remain supportive of the OFR and already produce voluntary OFRs. Their contention was to avoid reimposing the undue cost burdens of the statutory OFR.
	We have therefore elaborated on specific information relating to environmental, employee, social and community issues to be included for a better understanding of the company's business. This is the basic level of information that we would expect quoted companies to include in their business review. But if the directors consider that such information is not necessary for a better understanding of the company's business, they may say so and not include it. This is a matter for the directors' judgment.
	Finally, Amendment No. 314A would require the auditor to report on any other matters that are inconsistent with the information provided on non-financial KPIs that have come to their attention. We see this as reimposing a significant burden. The matter of the audit requirements was raised by a majority of the respondents to the Government's recent consultation. Some called for an audit opinion stating not only whether the business review was consistent with the accounts, but also that there were no inconsistencies with matters identified during the audit. That had been the level of audit scrutiny for the OFR. Others, however, pressed strongly for this higher level of audit requirement not to be reintroduced on the grounds of undue cost burdens.
	As I said earlier, removing the higher level of audit requirement for the OFR was a major saving of £30 million made by repealing the requirement for a statutory OFR. This is a crucial area of regulatory impact relating to narrative reporting that we have had to consider. We believe that the benefits of greater assurance on the business review do not justify the significant additional cost burdens of this additional audit check.
	We recognise that the noble Baroness proposes to limit the scope of the additional check by the auditors to reporting on inconsistencies with non-financial KPIs only, rather than on all information in the OFR. In reality, that will be no less of a burden, because the checking of non-financial information is onerous and therefore extremely costly, as I am sure the noble Lord, Lord Sharman, on the Liberal Democrat Front Bench will concede. This would be a nightmare in terms of costs and difficulty. That is why we propose that auditors should continue to be required to report only on the consistency of the business review as part of the directors' report, with the accounts, as required under Clause 487.
	We have developed what we believe to be a balanced and consistent package of proposals on narrative reporting, which reflects the outcome of our recent consultation and our discussions with interested parties. Our objective has been to ensure effective and appropriate narrative reporting without imposing unnecessary burdens on companies. We want to make a very clear statement of what we think are the principles of the directors' duties. We will stand very carefully behind that responsibility. We want to have reporting on this, but we want to do so without imposing on business a huge regulatory burden. I therefore urge the noble Baroness to withdraw this amendment.

Baroness Noakes: My Lords, Amendment No. 199 introduces a new clause after Clause 395. This new clause introduces what is known as a safe harbour provision. Clause 395 concerns extended narrative reporting to improve the information that companies make available about themselves and their performance.
	When the Government first consulted on introducing an OFR, which was the predecessor to what is now Clause 395, a number of responses said that the OFR would never advance beyond legalistic boilerplate unless there was a safe harbour provision. Indeed, the company law review also recommended a safe harbour provision, but the Government ignored that when they introduced the initial OFR requirements.
	We will never know what kind of OFRs might have come out of the statutory instrument that was introduced last year but withdrawn before it ever came into effect. We are clear, however, that the new business review requirements will not succeed unless there is adequate protection from legal liability.
	The Government have now introduced the new business law requirements but have not yet introduced related safe harbour provisions. Although I am well aware that, last week, the Government issued draft clauses on the liability of directors, they are not tabled for today's Report debate. Therefore, I felt it would be important for your Lordships' House to have an opportunity to debate the key features of a required safe harbour provision for a business review in the hope that whatever the Government bring forward for Third Reading will be satisfactory. I hope the Minister will outline the timetable for the new clauses and confirm that he will be tabling an appropriate amendment at Third Reading. We feel it would be inappropriate for this Bill to go to another place without a safe harbour provision.
	It will be clear that Amendment No. 199 is a probing amendment. When I tabled the amendment at Grand Committee the debate proceeded on general principles, not on the specifics. I am aware that the Government's draft clause is structured in a different way and, hence, is not directly comparable to Amendment No. 199. I shall not be arguing that the structure and scope of my amendment are superior, but I would like to draw the Minister's attention to subsection (3) of my amendment, which relates to the updating of statements included in the business review. As far as I can see, there is no equivalent in the Government's draft clause.
	This subsection was drafted to ensure it was clear that the directors had no ongoing responsibility to update statements in the business review. As I am sure the Minister is aware, it is based on the provisions of Section 102 of the 1995 Private Securities Litigation Reform Act in the United States of America.
	There is common ground that the most valuable aspects for a business review will be the insights it gives for the prospects of a company. So it is quite likely the information that is given about the prospects of the company will be overtaken by later information. Let us suppose that information is given about a company's market share based on trade association data, which several months later is revised and the market share is, thus, a smaller or larger figure. Alternatively, the company may comment on the relationship of its business to GDP growth but an oil price shock or something similar comes along, which destroys that relationship. Clearly, if that puts a company into profit-warning territory, there are already market obligations to update shareholders about the changes. But all sorts of changes that have been put into a business review would not put a company into profit warning territory.
	So the question arises whether the directors have to do anything if circumstances change after the business review has been prepared. My amendment makes it clear that they do not because anything else would require the directors to have their eyes firmly on the rear-view mirror, which is the very antithesis of what they should be doing to promote the success of the company. I hope that the Minister will explain the Government's position on the correction of information once it has been published. I beg to move.

Lord Sharman: My Lords, I am grateful for that intervention because I support the amendment in its totality. When we go back to the remarks made by the noble Lord on the Benches opposite about the welcome or otherwise of the OFR, one of the key issues of concern was the degree of care and the degree of liability attaching to it. If you want anything other than boilerplate reporting—it has been stated on numerous occasions in the debates on the Bill that what we are looking for is a development of narrative reporting; I stress the word "development"—we are not going to get to a fixed point in time with it. The process will develop over time. If you want that to take place and to address the issues that my noble friend Lady Northover and the right reverend Prelates opposite have been talking about, there must be some degree of protection. Otherwise all you will get—I would have thought that the noble Lord, Lord Clinton-Davis, with his background as a practising lawyer, would have understood this—you will get volumes of things known as completion notes or proof of notes. With those you can go back and relate every single comment in the report to something that can be substantiated in detail and with an audit trail. If that is what we want, fine; we will get it.
	But I do not believe that is where we want to go. I believe that we want to get to better narrative reporting and to see that process develop. To do that, it is absolutely essential to provide what I call a safe haven and the noble Baroness, Lady Noakes, calls a safe harbour, but we shall leave that to one side. Again, I support the amendment and I note that it is probing in nature. We look forward to hearing what the Government have to say and what they may bring forward at Third Reading.

Viscount Bledisloe: My Lords, I am impressed with what the noble Baroness had to say about subsection (3). It is essential that there should not be a duty to update the entire time, otherwise at what stage does one do so? Should one do that when one sees a change of 1 per cent, or perhaps of 5 per cent? One would be issuing something the entire time and, as the noble Baroness pointed out, spending most of the time in board meetings looking back at what had been said rather than looking at the future.
	However, I am somewhat surprised by the second half of subsection (2), although not to the same extent as the noble Lord, Lord Clinton-Davis. It seems surprising to say that someone is not in any way liable for a statement which is "untrue or misleading" unless they actually knew that it was. Is there to be no duty on directors looking at these reports to say to themselves, "Cor, that looks pretty surprising. Are we really right to say that we are going to make twice as much money next year? The sales prospects do not accord with what I thought was the atmosphere three months ago at the last board meeting"?
	I fully see that the duty should be limited because otherwise, as the noble Lord said, the review could become 400 pages long, 346 of which would be drafted by lawyers merely to provide one with a defence if one was sued on it. However, I think there should be, perhaps, some liability if a director fails to notice that what is being said seems wholly inconsistent with what had been said at all previous board meetings. He should take some care to ensure that the statements are not untrue or misleading, but I do not quite see how this ties in with a general duty of care. I agree that the general duty of care must be limited, particularly in the case of a non-executive director or a director who is not the production director in relation to finance and so on. He should not have to go in and second guess the man who drafted the statement and whose expertise it is.

Lord Sainsbury of Turville: My Lords, unlike some noble Lords, I very much understand the important issue raised by the amendment—that is, that there needs to be clear limits to the liability of directors in connection with the business reviews. As was discussed in Grand Committee, there is a broadly held view that it would facilitate open and meaningful reporting if there was clarity on liability. We have been discussing this issue with interested parties. It is clear that it is unhelpful to look at liability for business reviews under company law in isolation from other reporting and disclosure requirements, including disclosures which will need to be made once we have implemented the transparency obligations directive. What is needed is a coherent and consistent regime.
	In developing such a regime there are some key factors we must consider. First, there is the risk that, with too strict a liability for narrative reporting, company directors will tend to make caveats and heavily qualified statements, which could impose needless bureaucracy without achieving meaningful forward-looking statements. The same risks apply if the potential liability is unclear.
	Secondly, if we clarified liability for some aspects of reporting and not others, this could make the position worse. It is desirable to provide consistency in liability across the directors' reports and other narrative reporting under the Companies Acts as well as the transparency obligations directive implementation disclosures. We would still require a stricter liability regime for prospectuses as required under the prospectus directive as prospectuses are intended specifically to inform investment decisions and invite purchases of securities of the issuer.
	Thirdly, the nature of narrative reporting, which involves trying to predict future performance, with its inherent uncertainty, is different from accounts reporting, which is, to a much greater extent, objectively determinable. There is also difficulty in drawing a clear line between past performance reporting and forward-looking statements. It is an extremely complex area.
	As the noble Baroness will be aware, we have issued draft clauses for comment by interested parties covering provision for liability, both under Part 15 of the Bill for directors' reports, directors' remuneration reports or summary financial statements derived from them, and for disclosures under transparency obligations directive implementation. In both cases, these provisions ensure that directors will only be held liable for untrue or misleading statements and omissions made in bad faith or recklessly, and where there is deliberate and dishonest concealment. This is very close to what the noble Baroness is proposing. However, our proposals go further in seeking to provide clarity for those to whom the director may be liable.
	In that context, let me deal with the question of updating. We have not included anything on updating because there is no implication that you have to update reports. If we were to include it in relation to the business review, it could imply that there is a need to update other reports and accounts. Depending on the response of interested parties, we shall consider what measures on this might be brought forward for inclusion in the Bill. It would be unwise to rush today into introducing measures seeking to limit liability. We need to ensure that we set the hurdle for any potential legal challenge high enough so that directors can feel confident in what they say in their reporting but not so high that there is little incentive to be careful. In practical terms, we would like to bring forward clauses at the earliest opportunity but will wish to consider, in the light of responses from the interested parties, whether we can do that in time for Third Reading. I therefore hope that the noble Baroness will withdraw the amendment.

Lord Whitty: My Lords, while my noble friend has characteristically moved the amendment in a somewhat wide context, and the noble Lord, Lord Sharman, has responded in kind, I would like to point out the amendment is, in fact, quite limited. It is not like the groups of amendments that we discussed last night and earlier today which would significantly have changed the duties of directors. I had some sympathy with some of those amendments, and my name was attached to some of them. For example, I regret the withdrawal of OFR. On the other hand, I appreciate that the Government have moved some way to recognise the concerns that the noble Earl, Lord Sandwich—who is no longer present—emphasised today.
	However, the issue that we are discussing is much narrower and falls within the existing legal requirements for directors' duties. There is a requirement to report on remuneration and to have remuneration committees dealing with certain matters. As the noble Lord, Lord Sharman, said, this matter is subject to regulation by the FSA. It is also subject to codes of practice of the FSA and of various City and other institutions. The problem is that with that even with that degree of attention and a significant amount of transparency—indeed, one could argue that there is too much transparency in some remuneration committee reports, at least in the sense of their being far too detailed for anyone to comprehend—the report does not convey how those directors' remunerations have been determined in relation to what else is going on within their company.
	The House will recognise that both my noble friend Lord Lea and I come from a trade union background, so in a sense we represent the view of the employees within the individual company. They would like to know how their bosses determine their own pay and to what extent they take into account the pay that they are giving to their employees, both in the main company and in subsidiaries. However, the point is actually wider than that, as my noble friend Lord Lea said. If it is the case that the executives of leading companies are going way ahead of the general level of remuneration in the rest of the economy, let alone in the rest of their company, that is damaging to social cohesion and leads to a degree of suspicion and accusations of corruption from the rest of the population.
	We should be humble enough to recognise that occasionally similar doubts and accusations arise in relation to politicians; namely, that effectively we are a cabal of people who are paying one another large sums of money for not very obvious performance-related outcomes. That case can be made in relation to directors and the way in which remuneration committees have turned out. We have had committee after committee looking at this, but none of them has specified that there should be in the remuneration report a requirement that the directors set out how they have taken into account everyone else's wages and how they determined them, and that they have at least attempted to justify the level of remuneration for the directors in the light of that information.
	This is a fairly simple point, but it goes to the heart of how you sustain both a degree of coherence and loyalty within a particular company and a degree of social coherence, respect, understanding and equity in society as a whole. While this is a narrow point, which builds on what is already there, it is very important for the reputation of our larger joint stock companies and limited liability companies. I strongly support the amendment that has been moved by my noble friend, and I hope that the Government will take into account our arguments, if not today, at least in further stages of the Bill.

Lord Lea of Crondall: My Lords, I thank noble Lords who have taken part in this debate, in particular my noble friend Lord Judd. The final remarks of the Minister have inched us forward—or pushed us forward a few millimetres. Perhaps my noble friend's comments can be explained further when the Bill reaches the other end of the Corridor, as they were helpful. Of course, he has not made a commitment. He has said that the Government will consult on the desirability of this matter being part of the revised structure of secondary legislation. At least, I understand that that is the position. If I am right in that, we will think more about what we will say to our friends on our side of the House and in the other place. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	[Amendment No. 213 not moved.]
	Clause 413 [Requirements as to website availability]:

Lord McKenzie of Luton: My Lords, I shall speak also to Amendment No. 215. We accept that there may be problems with making corporate information available on a website. Primarily, companies could run the risk of penalties due to the differences in foreign jurisdictions and regulatory requirements on communications. I thank the noble Baroness, Lady Noakes, for raising the issue in Grand Committee and hope that she will be content to withdraw her amendment in the light of the government amendment, which achieves the effect that she seeks. I beg to move.

Lord Sainsbury of Turville: moved Amendments Nos. 218 to 219:
	Page 190, line 19, leave out paragraph (d).
	Page 190, line 21, leave out from "and" to end of line 22 and insert "on the directors' report"
	On Question, amendments agreed to.
	[Amendment No. 220 not moved.]
	Clause 416 [Name of signatory to be stated in published copies of accounts and reports]:

Lord Hodgson of Astley Abbotts: My Lords, in moving Amendment No. 223, I also speak to Amendments Nos. 238, 295 to 300, 492 and 507, which concern Clauses 427, 437, 467, 468, 769 and Schedule 9.
	We return to an issue that we discussed in Grand Committee on 7 March. I was very disappointed then, which is putting it mildly, at the Minister's initial response. He said:
	"Whenever we change the conditions for the audit exemption, we believe that it is important to have a public consultation to allow any interested parties to argue the case for the existing regime. In this case too, we would prefer to consider this change in the normal way. We will consider the merits of the proposal further, with a view to consultation if appropriate. If the results of consultation were to justify it, we would be pleased to make the appropriate deregulatory changes to the legislation"—[Official Report, 7/3/06; col. GC 283.]
	As I said then, to talk about the need for more consultation after an eight-year gestation period is candidly absurd. The Minister was kind enough to be slightly more conciliatory in his closing remarks when he said:
	"I have tried to acknowledge the issues that he has raised. If it will help, I will say more definitively that we will certainly consider this in more detail so that we may be able to respond in a way which helps him by Report; I understand that he is passionate about this. We will try to meet that in due course".—[Official Report, 7/3/06; col. GC 284.]
	That was a kind and generous offer. Now I see on the Marshalled List two groups of government amendments, led by Amendments Nos. 282 and 290 respectively, which, as I read it, are the Government's considered response.
	I look forward to hearing from the Minister in due course but, in the meantime, we have retabled our amendments. I think that, on the last occasion, tabling one large group of amendments did not give enough focus to our discussions. We did that then because we imagined—how wrong we were—that what we were proposing was totally uncontroversial. So now we have split the group into two; the position of independent charity examiners, and the audit thresholds. This group deals with the position of independent charity examiners.
	The amendments seek recognition of the specialist position of independent charity examiners in relation to the accounts of charities. We have here a clear opportunity to bring the Bill into line with the Charities Bill, which has already passed through your Lordships' House and is now in another place. Independent charity examiners fulfil the audit requirements of charities whereby, below a certain asset and turnover threshold, they are eligible for an independent examination of their accounts rather than the more costly accountant's report.
	The noble Lord, Lord Phillips of Sudbury, speaking for the Liberal Democrats, the noble Lord, Lord Bassam of Brighton, speaking for the Government, and the Opposition discussed the merits of this regime in depth during the passage of the Charities Bill, and for several hours in Committee, and the Government came to the conclusion that a change was desirable. Indeed, the Government introduced amendments to this effect. It is therefore extremely frustrating to see now that the Bill does not match up to its counterpart and give the required recognition to independent examiners. It will therefore bar charities, at least for the time being, from using a specialist body that was created to fulfil exactly this purpose and that has been checked out and verified by the Minister's colleagues in the Home Office. I am sure the noble Lord, Lord Bassam of Brighton, will be happy to confirm this.
	A charity is not like a commercial company. Its approach and objectives are quite different. Its supporters need different information from that required by shareholders in a commercial enterprise. This is recognised by the Charity Commission and the accounting profession, in that there is a special charities statement of recommended practice. After all this work, including the creation of a recognised professional association, the Association of Charity Independent Examiners, to control the development of the profession and to set professional standards and so forth, the Minister wants more consultation. I respectfully suggest that this would be superfluous. We have, as I said, already had eight years of a general consultation on the Bill, and much debate on this point during the passage of the Charities Bill. As the Minister said himself in Grand Committee on 7 March:
	"Discussion of charities law is the right context in which to consider those thresholds".—[Official Report, 7/3/06; col. GC 282.]
	So, we have already discussed this issue in a charity forum, and the Government have decided that now is the time to link the Bill to the results of that debate. The amendments would allow small charities, for which provision is made in the Charities Bill for independent examination instead of an accountant's report, to have the same eligibility in this Bill, thus avoiding the confusion and expense of overlapping authorities in this important area.
	Finally, when the Minister comes to reply, I hope that he will not rely on government Amendment No. 282. Please let us have not yet another general power which may or may not ever be used. Today is the day for joined-up government between the Home Office, on the one hand, for the charities and the DTI, on the other hand. This is a day for action. I beg to move.

Lord McKenzie of Luton: moved Amendments Nos. 267 to 268:
	Page 204, line 27, leave out "directors' reports and operating and financial reviews" and insert "and directors' reports"
	Page 204, line 29, leave out "directors' reports and operating and financial reviews" and insert "and directors' reports"
	On Question, amendments agreed to.
	Clause 441 [Disclosure of information by tax authorities]:

Baroness Noakes: My Lords, here we come to the first of a series of amendments to Chapter 12 of Part 15 and to Chapter 1 of Part 22. These amendments concern the use of confidential information and in general seek to establish that proper restraints are in place on the use of confidential information. There is a balance to be struck between the needs of effective government on behalf of citizens as a whole and the rights of individuals and businesses, and I do not pretend that getting it right is easy. But the role of your Lordships' House is to challenge legislation when it takes rights away—in this case, the right to have confidential information kept that way.
	With those introductory remarks, I turn to Amendment No. 271, which would delete the word "private" from Clause 443(1). The clause relates to information obtained by the Financial Reporting Review Panel and provides restrictions on what may be done with information relating to the private affairs of an individual. Clause 630 is in similar form, but applies to the Takeover Panel; Amendment No. 450 seeks to delete the word "private" from that clause. These are probing amendments.
	So far as I can ascertain, no definition of the word "private" is given in the Bill, and it is important to be precise about it because private information is protected in some measure by Clause 443, but non-private information is not. I invite the Minister to tell us what private information means for these two clauses, and I hope that he will give examples of information that is both private and non-private. I beg to move.

Baroness Noakes: In moving Amendment No. 275 I shall also speak to the other three amendments in this group. As with the earlier groups, these amendments deal with both the FRRP in Part 15 and the Takeover Panel in Part 22, and they are in similar form.
	Under Clause 444 the FRRP may disclose information to an overseas body, but subsection (6) requires the FRRP to have regard to whether the likely use made by the overseas of the body is "sufficiently important" to justify making the disclosure. Amendment No. 275 replaces the words "sufficiently important" with "necessary and proportionate". Amendment No. 460 does the same thing with regard to the Takeover Panel's disclosures.
	The words "necessary and proportionate" have the immense virtue of creating equivalence and read-across to the Human Rights Act and the Data Protection Act, Acts of which we know the Government are inordinately proud. Those words are now a part of our law, and we feel it is important to have common tests applying to substantially similar situations where we are dealing with the rights of individuals potentially being removed, in this case in relation to confidential information. Furthermore, I understand that the word "necessary" would offer additional safeguards for individuals or businesses, because they would then have the option of applying for judicial review of any disclosures of information that would be made.
	I have put Amendments Nos. 276 and 461 with this group for the convenience of the House, though they are on a rather different point. When the FRRP considers disclosure to an overseas authority, it also has to consider whether the overseas body has adequate arrangements to prevent further improper disclosure. Amendment No. 276 adds the words "and effective". Amendment No. 461 seeks to achieve the same effect with a similar provision in Schedule 2 for the Takeover Panel.
	In our view the FRRP or the Takeover Panel should go beyond adequacy and focus on effectiveness. For example, the procedures may appear adequate on paper, but the way in which they are interpreted or operated may fall far short of the standards we regard as important. There is no point in pretending that bribery and corruption do not feature in the practical way of life in several important countries. It is important to look beyond the mere adequacy of the paper arrangements and consider how things work in practice. I beg to move.

Baroness Harris of Richmond: rose to ask Her Majesty's Government what effect the plans to merge the 43 police forces in England and Wales will have on the fight against crime.
	My Lords, I live in the beautiful rural area of north Yorkshire. We are blessed with an excellent police force led with imagination and vitality and which produces, year on year, extremely good results. For example, this year the detection rate is 35.2 per cent—one of the best performance rates in the country. Arrests have increased and crime has fallen. We have 399 neighbourhood police officers, more special constables and 75 newly created community support officers. Generally speaking, the communities living within this huge tract of the country are satisfied with their policing and have plenty of opportunity to voice their concerns, should they have them, at the various partnership meetings and police authority meetings held regularly up and down the county.
	I was privileged to chair my county's police authority for a number of years and I retain an active interest in policing generally, having spent more than 20 years as an elected member of a police authority and its predecessor police committees, and as a member and deputy chair of the Association of Police Authorities. I was also a magistrate for 16 years. I was deeply saddened, then, to see the former Home Secretary's decision to radically alter the structure of forces and police authorities on the advice of one former chief constable producing a report of staggeringly simplistic conclusions. The timescale for such enormous changes is ludicrous. An affirmative order after just four months' consultation is the only thing necessary for the Government to wipe out years of stable, carefully balanced and considered policing for local communities. It will make central control of huge forces much easier, and there will be demonstrably less scrutiny by locally elected people, who serve on their authorities, because there will be fewer places on these new authorities, which will cover much larger areas. As the Police Federation of England and Wales so aptly put it, if amalgamations go ahead, the public must be left with an improved, more effective force able to provide better service. There is absolutely no indication that making forces merge to create monster organisations will do anything at all to improve policing for local communities. Reform should be carried out on a basis of service effectiveness, not just financial efficiency or, I add, political expediency.
	While I acknowledge that my force and police authority have agreed to an amalgamation with south and west Yorkshire and Humberside—a simply vast area of England—those forces do not want to merge with us. District councils and the City of York are also unhappy about many aspects of the decision to merge, albeit that the submission is hedged about with caveats so great I do not believe that the Home Secretary will take much notice of them.
	The Police Federation in north Yorkshire suggests a federation of forces in our region, and that is supported by a cross section of Yorkshire parliamentarians. A federation of forces would allow greater collaboration between forces on protective services, as happens now to an extent, and we call it mutual aid. Services such as air support, firearms training, clothing and vehicle procurement and so on, can all be done through collaboration, and that could be put on a more formal footing, but the individual forces could maintain their independence and local accountability to their communities. As your Lordships may imagine, there are huge differences in policing needs within this vast region, and, indeed, not just in the north. Up and down the country I am being made aware of similar deep concerns.
	In a letter that I received from the chair of West Mercia Police Authority I am told that there is very considerable public opposition in its area and that its local government partners have also expressed their opposition. Surveys there have shown that more than 80 per cent of respondents are against a merger. West Mercia is set to merge with West Midlands, Staffordshire and Warwickshire. It makes no sense at all. The letter goes on to quote Mr Blair, then shadow Home Secretary,
	"a wholesale amalgamation of the smaller police services . . . will remove local policing further from local people".—[Official Report, Commons, 5/7/1994; col. 273.]
	We are told that things have changed dramatically since then, but the things that concern most people are the locally disruptive crimes and anti-social behaviour, just as it has always been. West Mercia is not alone in finding such adamant opposition to these proposals. How amazing that Wales should be one single force. But I shall let my noble friend Lord Roberts of Llandudno speak about that.
	Let us now move to the cost of these amalgamations. These vary widely, as might be expected. The Home Office says that amalgamations in north Yorkshire will cost £39 million and the police authority says that it will be £52 million, but even a £13 million variance is a pretty sizeable chunk of money to be wasted on a huge bureaucratic exercise which will be of no appreciable benefit to the policing of communities. It diverts money from where it is needed—front-line policing and the fight against organised crime. Multiply that amount throughout England and Wales, in each force and each police authority, and we begin to see what a fabulous amount of money—£500 million has been mentioned—can be squandered on a premise that our protective services are insufficiently robust to meet the new demands on our policing service. There has been no accurate costing of any of these amalgamations, but I refer noble Lords to an article in Police Professional by the Chief Constable of Gloucestershire, who is head of the ACPO Finance Business Area. Time does not permit me to quote from it but it makes very interesting reading.
	Of course it is right to ensure safety and security but there are ways of producing structures to enable that other than the major structural upheaval envisaged by amalgamations. Large-scale serious crime must be effectively addressed but surely the needs of individual communities for policing, focused on local crime and providing proper levels of service for individuals and localities, are equally important.
	We used to have regional crime squads. I know as I was a member of one; it dealt with organised crime, terrorism and other serious national policing activities. It worked closely with police forces, not always amicably but at least with greater accountability than anything we have seen since their amalgamation into a National Crime Squad, and further still into the Serious Organised Crime Agency. I believe that by creating those squads again we could deal effectively with the Level 2 crimes which so taxed the HMIC, which wrote the report on force amalgamations. Has that ever been considered?
	Has the Home Office looked at perhaps extending SOCA's remit to bring together all policing of a national function around organised crime, which is being dealt with at present by the Metropolitan Police and in specialist branches within provincial police forces? Has he looked at creating a national border force, bringing together the present border control functions of Customs and Excise, the Immigration and Nationality Directorate and all the police posts that guard ports and airports? Indeed, would it not be better to look at merging functions instead of forces?
	There are serious questions of governance, accountability and membership of the new police authorities but the most important in my eyes is the loss of the tripartite system of policing we have enjoyed so successfully for so many years, and in which policing by consent is enshrined. That is set to be swept away in the forthcoming Police and Justice Bill as the Home Secretary takes more and more powers unto himself. The merging of forces is but a foretaste of what is to come; that is an argument for another day.
	I will end on a sympathetic note to our police service. Merging police forces is not the answer to delivering the quality of service that we now demand from our police. They can be forgiven for feeling jaded and cynical. They have been delivering the goods; and now they are told that once they are bigger, they will be better. A recent study by the Rowntree Trust said that making local organisations much bigger never in the past demonstrated any concerted improvement and represented a significant loss of democracy. Clarity of accountability will be lost, where there should be transparency. Small urban populations and semi-rural and rural communities up and down the country will be marginalised.
	Already a quite enormous amount of paperwork has been undertaken by order of the Home Office in all the forces for which these amalgamations will be effected, taking away from active duty able and highly regarded police officers; instead up and down the land they have had to toil away at the Government's behest justifying or otherwise whether they should merge with each other—what a complete waste of their time. One size does not fit all; there should and could be different solutions to this perceived problem. I urge the Government, even at this late stage, to look at them. The identification of a constabulary with the community from which it is drawn and which it protects is of substantial value; indeed it is the relationship that defines policing by, for, and with its local community. We change it at our peril.

Viscount Tenby: My Lords, I congratulate the noble Baroness on putting down this Unstarred Question and on kick-starting the debate with an arresting speech.
	I think that it is right to say that opposition—and it is cross-country and cross-party opposition—to the proposals centres around a number of major concerns: the timetable; the possible cost to council tax payers; the threat to local policing and the effect on the police themselves; and whether finally such a solution, as opposed, say, to federation, will help in the fight against cross-border crime and terrorism.
	The timetable for the process is, and in some cases has been, unwisely short, and to date only two forces have voluntarily agreed to merge. I was most interested to hear the remarks of the noble Lord, Lord Jones, and I want to hear what the noble Lord, Lord Roberts of Llandudno, has to say about the grotesque political decision to merge the police in Wales into one body. The biggest upheaval in the structure of the force for 40 years surely merits a period for discussion and informal, unprejudiced analysis. It is true that some forces, as presently constituted, are almost certainly too small to cope with the new brands of cross-border criminality and changed circumstances.
	What steps have been taken so far to set in place co-operation between different forces? What arrangements are there for the pooling of resources such as aircraft, helicopters and boats? Can the Minister confirm that IT compatibility and full user co-operation is in place in all forces within England and Wales? To repeat a question that I asked in the debate in March, and to which I have yet to have a reply: are there any plans to draw together within a national framework Special Branch officers scattered throughout the country within the various forces? I should be grateful for the Minister's answers to those specific questions.
	Next, I turn to the issue of cost. It does not take a guru to point out to the Government in political terms the danger of adding merger costs to already overloaded council tax bills in a process which is likely, under present plans, to surface at just about the time of the next election. The threat to council tax payers inherent in the equalisation process—as yet, barely comprehended by anyone—will become apparent when, in many cases, council tax payers find themselves paying a higher precept for themselves and receiving reduced services.
	On the threat to local policing, I am a little more sanguine. A good local structure with dedicated and experienced officers should be able to withstand any shake-up, but I am worried about the morale factor in affected forces. Mergers inevitably must mean redundancies, anxieties about future career prospects, and posting for families out of area and so on. What long-term plans are there to reassure staff at all levels that they have meaningful career prospects?
	Management of amalgamations and operational control of new enlarged forces will require special skills. Is the Minister satisfied that there is a large enough reservoir of talented senior officers to meet this need?
	In the final analysis, and to emphasise again the point that I have already made, it does not much matter whether one has 43 or 12—or any number you care to think of—forces. If they are unable to communicate properly with one another or the other component parts of the justice system in as short a time as possible, then we are not one step further towards combating serious crime and terrorism.

Lord Bradshaw: My Lords, I am a member of the Thames Valley Police Authority and have been for 11 of the past 13 years. Can the Minister tell us tonight why, in this age of so-called joined-up government, we have two departments—on the one hand, the Home Office and, on the other, the Department for Communities and Local Government—setting out proposals for reform which have diametrically opposed objectives and means of achieving them?
	David Miliband, the then Minister for Local Government, set down five principles against which proposals for reform were to be developed. Within those proposals for local government, which will now be taken forward by Ruth Kelly, is a strong element of voluntarism. That is, he is asking local authorities whether they want to merge. He started at the bottom and not at the top, telling them what to do; he is asking them what they want to do. He said that there would be no compulsion. He also said that it must cost no more money. Two large government departments are talking to people with an entirely different voice. I ask the Minister not to give us some waffly answer, but to tell us why these two departments are talking with forked tongues. The Government are talking with a forked tongue. It is completely baffling to people in local government who are charged with managing the local police force.
	In his comments so far—in a White Paper to be—David Miliband has placed strong emphasis on local empowerment, which is about allowing people the opportunity to shape their communities and to ensure that services are delivered in an efficient, integrated and value-for-money way. I am sorry, but Mr Clarke's proposals do not meet any of those principles. They are being inflicted on local government at the same time because police authorities are part of local government.
	We should contrast David Miliband's approach with the position of the police, where economy in the first few years will not happen. I have taken part in a number of such reorganisations. Some did not even taken place in the end, but all cost vastly more money than was ever envisaged at the outset.
	Forces are to be separated from local communities, except for very local crime, such as criminal damage. Accountability will be destroyed. In the large police authorities, about which my noble friends Lady Harris and Lord Phillips have spoken, if we have three-county or four-county mergers, how will members of the police authority be accountable? There will be so few of them covering such large areas that they will never be accountable to local communities. In the case of north Wales, I, too, have spoken to Malcolm King and have heard the despair of somebody who has always supported the Labour Party and who was Labour through and through; I have spoken to several other members of police authorities who think that the Government are stark, staring mad to go forward with these proposals. I hope that the Minister will say that the new Minister will at least look again at these proposals.
	My authority will stand alone. Will the authorities that stand alone have money for local policing or protective services, or will all the money go to the amalgamated forces?

Lord Roberts of Llandudno: My Lords, we have already heard from three other Peers—my noble friend, as I shall call him, Lord Jones, the noble Viscount, Lord Tenby, and my noble friend Lord Bradshaw—about the terrible discontent in north Wales. Wales is overwhelmingly against these mergers.
	As recently as 27 April, the chair of the Police Authorities of Wales said in a letter:
	"I am writing to express our concern at the current process to restructure the four Police Forces and Authorities in Wales into one Strategic Police Force and Authority".
	The issues raised are the haste of the changes, finance and funding, precept equalisation, governance and accountability. All those issues have been touched on already.
	The chairman of the North Wales Police Authority, Councillor Ian Roberts, was one of six police authority chairmen who wrote to The Times this very Monday urging the new Home Secretary to think again. They said:
	"The current proposals are being rushed through . . . [they] could lead to a damaging reduction in performance, a collapse in neighbourhood policing, and a significant loss in accountability. Opinion Polls show overwhelming public opposition".
	Councillor Roberts has said elsewhere that it was a crash waiting to happen.
	That contrasts so much with a Written Answer from the Home Office Minister to me on 20 April this year, which stated:
	"All four police authorities in Wales recognise that the option of a single strategic force for Wales is operationally viable, although they share some concerns".—[Official Report, 20/04/06; col. WA 252.]
	Some concerns! What a massive understatement of the opposition to the proposals. The truth is that the Government, having made up their mind, refuse to listen or respond to any doubts or opposition.
	It was the same with the debates on interviews for passports. Only last week, we were told that there would be remote area webcam interviews. Of course these lead to identity card interviews, but how can you take somebody's fingerprints or iris scan by webcam? These issues have not been thought through. They are a total muddle, as are these merger proposals.
	There is a vast difference between policing a lightly populated rural area and policing a heavily populated urban area. The crime rates are vastly different. Last year, Newport, Gwent, had 141 offences per 1,000 people. Dyfed-Powys on the other hand has the lowest crime rate in the whole of England and Wales—much less than half that of Newport and Cardiff. The policing is different. Dyfed-Powys has fewer inhabitants per square mile than anywhere else in England and Wales—an area of 4,227 square miles with a population of 503,663.

Viscount Bridgeman: My Lords, I am not alone in thanking the noble Baroness, Lady Harris of Richmond, for initiating this interesting and meaningful debate. Nor am I alone in deploring the undue, even unseemly, haste with which this programme was pursued by the previous Home Secretary. The change of regime at the Home Office provides a great opportunity to stand back and readdress the whole proposal, let alone the absurd timetable for putting it into effect.
	The abolition of the Office of the Deputy Prime Minister provides another opportunity to readdress the negative effect regionalisation is having on this matter. I hesitate to intrude on the eloquence of the Welsh noble Lords, but why is it, for instance, that Cheshire was not allowed to consider amalgamating with North Wales? That would make far more logistical sense than for the latter to merge with the mid and south Wales forces, as noble Lords have pointed out. I, like many noble Lords, will have had briefings from West Mercia, East Midlands and Cleveland forces, among others, making a strong case for independence, each expressed in different ways.
	Several noble Lords have talked about the advantages of federation, most eloquently the noble Baroness, Lady Harris, in her opening speech. This route has the great advantage, if properly structured, of preserving the relationship of the local force with the community it serves, upholding a tradition which goes right back to Sir Robert Peel. This involves the sharing of specialised services—for instance, the back office, forensic work, firearms training—and the sharing of expensive equipment such as helicopters. Work was well advanced on this procedure by Surrey, Kent and Sussex, and cut short by the previous Home Secretary's announcement setting out the programme for amalgamations which has attracted so much criticism. It is in operation already, in various degrees of development, between a number of other forces and has the great advantage of flexibility. It certainly avoids the traumatic effect—and, indeed, cost—of larger former amalgamations to which many noble Lords have referred. An argument advanced against this form of co-operation is that certain police officers, and perhaps their committees, might see their forces as sacrosanct and be unwilling to co-operate. However, the Police Act 1996 gives the Home Secretary the power to direct such a course.
	I do not wish to intrude on private grief, but perhaps it is revealing—I am updating the noble Baroness, Lady Harris—in the light of the events of last week that, on 18 January this year at Prime Minister's Questions, the Prime Minister said:
	"It is important that we listen to local people, and I can assure the hon. Gentleman that we will do so. Of course, many different things could happen, including forces coming together for certain strategic tasks that they are better able to fulfil on a common, rather than singular, basis".—[Official Report, Commons, 18/1/06; col. 836.]
	Or again, on 25 January, when he said:
	"We have to listen to what people are saying and, obviously, there are different views about police reform. One possibility is for strategic coming together on certain issues, rather than mergers, but that has to be looked at on a case-by-case basis".—[Official Report, Commons, 25/1/06; cols. 1425-1426.]
	Miss Hazel Blears appeared to have decided that enough was enough. She was reported in The Times the next day as saying that she, the Minister for Policing, Security and Community Safety, had the power to order police mergers. Forces would need compelling cases to survive and show that they could match bigger forces. Is this joined-up government?
	Mr Clarke has gone, Miss Blears has gone and the Office of the Deputy Prime Minister has gone. The Prime Minister has not yet gone. Let us hope that Mr Reid will listen carefully to the Prime Minister's words. This is a great opportunity drastically to modify this ill-thought-out plan with a timetable that beggars imagination. I hope that the new Home Secretary will see the best of the federation plans as a model and roll them out across England and Wales. Will the Minister also, with the passing of the ODPM, examine the regionalisation programme and recognise that criminals do not, on the whole, recognise regional boundaries? That way, we can effectively fight crime, the subject of the Question tabled by the noble Baroness, Lady Harris.

Lord Bassam of Brighton: My Lords, I pay tribute, as all other speakers have done, to the noble Baroness, Lady Harris, for raising this debate in such a timely way, and for focusing so neatly on the important range of issues. I congratulate all other speakers, because they have, in fairness to them—although I am obviously going to disagree with their points—highlighted the evident concerns in a national debate. That is important. I was particularly keen to hear what people have to say about issues such as cost, local identity, the importance and value of esprit de corps, the key questions on resources and, in general, public reaction as well.
	Having congratulated all on their contributions, we ought also to reflect on where we are with the policing of our country. Since Labour has been in government, we have had more resources for the police service. We have more police officers than we have ever had—an historic high. We have more police support and staff and, of course, critically, we have a new and directly focused central government agency to attack high and big crime. There have been significant improvements as a consequence.
	It is also important that we are aware of the significant benefits police restructuring can bring in our fight against crime, the central point of the Question. Before I describe how restructuring will enhance the police service's performance in tackling both level 1 and level 2 crime, I want first to set out the current situation.
	As we know, the police service under the current 43-force structure has made—as all speakers attested—significant strides in dealing with level 1 crime. Success at that level has been driven by strengthening local policing—something we all support—which is structured around the basic command unit, to use a bit of jargon. We have seen a 35 per cent reduction in overall crime since 1997, and the fact that the chances of being a victim of crime are at their lowest since the British Crime Survey began in 1981 is something we can all welcome. This Government are further determined to build on achievements at a local level, as demonstrated by our commitment to providing dedicated, visible, accessible and responsive neighbourhood policing to all areas by 2008.
	Notwithstanding the success at local level, we are committed to further improvements as part of our programme of reform and want to develop a police service that is fit to tackle the complexities of 21st century crime; that is, one that is fit for purpose. We have now had more than 30 years of the current structure, and there is a clear professional acknowledgement of the need to address the gaps in protective services highlighted in HMIC's findings. In this evening's debate, I did not hear recognition of the wide changes in our society or an acknowledgement that what was fit for purpose 30-plus years ago is not necessarily fit for purpose in the 21st century. The noble Lords, Lord Phillips and Lord Roberts, and other noble Lords talked about the small forces that merged into larger forces and then merged into even larger forces. There was a reduction from something like 168 forces in 1964 to the current 43 by the end of that decade. That was for a good reason: forces needed to be larger to deal with the complexities of the time. We believe that forces need to be larger now to deal in a targeted and focused way with cross-boundary issues and widespread criminal activities that spread across the country. Notwithstanding that, we also need to focus on local crime as well. That is why the BCU structure is so important.
	I want to try to answer the points raised, and I encourage the noble Lord, Lord Phillips, to restrain himself. I know it is difficult. Some of the stark findings in HMIC's report were that,
	"less than 6 per cent of over 1,500 big organised crime gangs are targeted by police in the course of a year . . . three quarters of forces did not have fully resourced specialised murder units,"
	and,
	"only 7 out of 43 forces deploy special branch alongside neighbourhood teams and capture community intelligence".
	That is all due to the lack of capacity and capability within the current police force structure to tackle serious and organised crime effectively. To address that, HMIC has recommended the development of strategic forces in order to equip the police service to provide effective level 2 protective services. These include serious and organised crime, counter-terrorism and domestic extremism, civil contingencies and emergency planning, critical incident management, major crimes such as homicide, public order and strategic roads policing.
	A large part of this debate focused on accountability. That needs to be kept in perspective. Our current police authority structure means that people feel remote from the police authority. We need to build back at a lower level, and that is part of our reform agenda. We need to understand that. We have been working closely with the Association of Police Authorities, the Association of Chief Police Officers and others to strengthen governance and accountability arrangements at force level and at the level of basic command units. That is where we need to put additional effort. So I reject the contention of the noble Lord, Lord Bradshaw, that new localism—the Miliband argument, if you like—and the merger approach that we are adopting in the Home Office with regard to police authorities are necessarily at odds with other. I do not believe that they are.
	We continue to see a vital role for police authorities in the new landscape. Provisions in the Police and Justice Bill, to which the noble Lord, Lord Dholakia, referred and which was introduced in the other place in January, will strengthen the membership and functions of police authorities. It will be important for police authorities to focus on their core strategic functions; namely, setting policing priorities for the force area, appointing the chief constable and other chief officers, holding the chief constable to account for the discharge of his or her functions and setting budgets for the force and the policing precept. Basic command unit commanders and senior representatives of other responsible authorities will also hold regular public briefing sessions and open sessions to respond to issues raised by local communities.

Baroness Noakes: My Lords, I thank the Minister for that explanation, which, I fear, has not taken us much further forward than the point that we reached in Grand Committee.
	The Minister said that to allow information to be disclosed to overseas bodies not similar to a public nature in the UK would contravene the spirit of the Act. I have never known the spirit of Acts acting as a practical restraint when power came to be used. There is no jurisprudence on the spirit of legislation, as far as I understand it. The Minister has said again that he cannot predict how the power could be used and invites us merely to rest on the negative procedure, which is the weakest.
	There are various issues about the disclosure of information that we will want to clarify with the Minister between now and Third Reading. I must say that we are not entirely happy; but that is not the only area in which we are not entirely happy about the clauses. I seek further clarification, but, in the meantime, I beg leave to withdraw the amendment.

Lord McKenzie of Luton: My Lords, as I indicated when we debated the other amendment in the name of the noble Lord, Lord Hodgson, on the audit of charitable companies, we are going to consider removing small charitable companies from requirements in the Companies Acts to have audits, leaving their audit regime to charity law—even more so in the light of the earlier decision of this House on Amendment No. 223. In the meantime, the two government amendments, Amendments Nos. 290 and 293, simply bring the thresholds for charitable companies into line with the thresholds in the Charities Bill currently before Parliament.
	Notwithstanding the earlier decision on reporting accountants, I do not believe it would be appropriate to change these thresholds in the way proposed in the noble Lord's amendment. The government amendments would bring them into line with the thresholds in the Charities Bill. To go any further at this stage and in this way risks creating confusion. Nevertheless, we agree to consider whether, and if so how, to bring the audit requirements for small charitable companies into line with those applying to unincorporated charities.

Baroness Noakes: My Lords, in moving Amendment No. 312, I shall speak also to Amendment No. 313. Amendment No. 312 seeks to make the power contained in Clause 484 subject to the affirmative rather than the negative procedure. Amendment No. 313 seeks to remove Clause 484 and its power completely.
	Clause 484 is part of the Government's restless desire to take control over every minute aspect of corporate life. It seems innocuous enough—let us disclose the terms on which the auditors are appointed, remunerated and carry out their duties—but this proposal has no firm policy foundation, is not sought by shareholders and a perfectly good mechanism already exists which could achieve its aims if it was ever thought desirable.
	I think the auditors themselves may have initially floated this idea of publishing their terms of appointment—probably in the confused post-Enron environment—but I cannot recall ever hearing shareholders saying, "I need to see the auditors' terms of reference". But the idea somehow got into the public domain and it has been considered seriously by the Financial Reporting Council, which has been given the responsibility by the Government to develop and oversee corporate governance in the UK. As the Minister is aware, the FRC duly consulted on this late last year and found very little appetite for it. Accordingly, it proposes not to amend the combined code at present. But the important point is that the FRC can do so in future if ever demand arose to see the auditors' terms of appointment, or if the FRC thought it would be beneficial.
	The Minister in Grand Committee reported that there was widespread support for this power when consultation was carried out. But that was some time ago and the FRC's consultation is much more recent and relevant.
	As the chairman and a member of a number of audit committees, I am obliged to look at these documents. They are turgid. They are drafted by the auditors' lawyers, vetted by the companies' lawyers, and I can honestly say that I have never found anything useful in them. As the noble Lord, Lord Sharman, pointed out in Grand Committee, since audits are prescribed by statute, they tend to be concerned with liability rather than their content of the audit.
	I do not believe that the Government have made a case for having this power. The FRC exists and could do this job perfectly well if ever there was a necessity or reason for so doing. But if the Government manage to persuade us that they should have yet another power to interfere, we agree with the CBI that at the very minimum, this should be subject to the affirmative procedure. I beg to move.

Baroness Noakes: My Lords, I tabled this amendment before realising that the Government intended to restructure Clause 497, which is the effect of Amendments Nos. 326, 327 and 328, to which the Minister has already spoken. I could have retabled this amendment as an amendment to the Government's amendment, but I have left it in as a probing amendment for today's proceedings.
	When we debated Clause 497 in Grand Committee, it was clear that the Government see the decision not to name the auditor as being taken by the company and not the directors. The noble Lord, Lord McKenzie of Luton, said that it required a resolution of shareholders. I do not understand how a resolution of shareholders can be obtained without disclosing the name of the auditors to each of the shareholders. If that is the case, the aim of confidentiality will potentially be defeated, especially if a terrorist group or similar had purchased a small number of shares precisely to ensure that they got access to as much information as possible. The noble Lord said that he would write to me; but he did not. I have tabled the amendment to clarify the situation. I beg to move.

Baroness Noakes: In moving the amendment, I shall speak also to the other amendments in my name in this group. Clauses 498 to 500 create a remarkable new departure in our law, because they create a criminal offence for one class of professional person—auditors to companies. Our amendments fall into two groups: Amendments Nos. 333, 334 and 335 propose the deletion of this offence in its entirety; Amendments Nos. 329, 330, 331 and 332 seek to amend the offence so that it has fewer undesirable features. I shall speak first to Amendments Nos. 333 to 335.
	We established in Grand Committee that the existing law, together with the Fraud Bill, currently before the other place, will provide criminal sanctions for the vast majority of auditors who would be caught by these clauses. The Government say that the new offence is needed to catch auditors who consciously turn a blind eye or choose not to carry out work that might uncover problems. The Government say that a criminal offence should apply to such auditors, whether or not fraud or dishonesty is involved. The Government have produced no evidence that there is a problem with auditors who are not fraudulent or dishonest, but who turn a blind eye to problems. I do not believe that it is appropriate to create a criminal offence on the basis of an unproven hypothesis.
	The real fear among the auditing profession is that the new offence will not just cover the hypothetical blind eye but will criminalise negligence. It is far from clear that the wording of the new offence, which uses the concept of "recklessly", will not catch cases of misjudgement or negligence. The Minister is aware that "recklessly" carries many meanings, and it is the ambiguity that is associated with it that is the cause of great concern in the auditing profession.
	All professionals are subject to lapses of judgment, or making errors in adhering to their professional standards. Doctors and nurses occasionally kill people through such errors, but there is no special criminal offence for them. That is dealt with through their professional disciplinary procedures. The Government have never explained why auditors should be treated differently. The accountancy profession has an elaborate set of disciplinary procedures that have only recently been overhauled at the behest of the Government. These procedures carry the possibility of unlimited fines and the removal of the right to practice.
	We understand that serious concerns are being raised among those charged with disciplinary processes about the harm that the new offence will do to the effective operation of those disciplinary procedures, especially because the interests of audit firms and their partners and staff will diverge if criminal prosecutions hang over the heads of the latter.
	The offence is drafted at a petty level of detail. Under Clause 498(2) the offence applies if the auditor knowingly omits a statement on the remuneration report. An auditor who issues an audit report and financial statement that shows a true and fair view when he knows that it does not is one thing. That is the main purpose of an audit—to say whether or not the accounts show a true and fair view, as Amendment No. 332, in the name of the noble Baroness, Lady Goudie, emphasises. Omitting something about the information in the remuneration report is at such a different extreme from whether or not the accounts show a true and fair view that it seems almost laughable that a criminal offence is created, except that it is not a laughing matter for the auditors who get caught up in this.
	Even if we think that there might be at the margins the case of the occasional auditor who neglects his duties in a way that is not caught by the existing law, and there is a prima facie case for overriding the professional disciplinary rules in favour of a criminal offence, we as legislators need to consider the costs against the benefits of such a move. It is difficult to see how there are any benefits to society, given that the auditors' disciplinary procedures can remove an auditor's ability to audit, thus providing all the protection that the public need.
	The Government seem to believe that the threat of criminal prosecution will incentivise auditors to act properly. But I believe that the biggest impact will be risk-averse auditing and higher audit costs. The threat of a criminal record for cases that fall far short of dishonesty and fraud will lead the auditing profession to try to prove their audit processes against prosecution. Even if auditors believe that their existing processes would withstand disciplinary scrutiny, they will want to avoid any possibility that a criminal prosecution will be maintained, especially with the wide and uncertain formulation in Clause 498. Put simply, they will do more auditing, more documentation, more double review and more double checking. They would be fools not to do so.
	Auditors have advised us that the way in which Clause 494(2) is drawn will also drive them to more extensive testing of immaterial accounting records. What will happen to all these costs? It will lead to increased audit fees, which will mean that this Bill will impose a regulatory burden on businesses of all sizes of a very uncertain amount. In the US the Sarbanes-Oxley Act has resulted in a hike in audit fees for listed companies of between one third and three quarters. Clause 498 could do exactly the same here, which is why the CBI strongly oppose this offence.
	There are other consequences, which I am sure are all unintended by the Government. The audit firms are already reporting that their most able partners are reluctant to specialise in audits, and a cloud is starting to hang over the recruitment of trainees to the accountancy profession.
	All of this will drive the brightest and best away from the audit firms. That is not in the interests of UK plc.
	It will be plain that my preference is for this misconceived offence to be removed from the Bill. I would be delighted if the Minister were to say today that the Government have had a Damascene conversion. At a minimum, however, I hope that the Government will support Amendments Nos. 333 to 335 on the basis that they at least remove the worst effects of the new offence. These amendments replace the words "knowingly or recklessly" with "dishonestly or fraudulently", and delete the word "misleading".
	It is impossible to find a single stakeholder group outside the Government which in favour of this new offence. However, plenty have publicly or privately voiced their concerns to the Government, as I am sure the Minister will be well aware. So far, it has all fallen on deaf ears. I hope that today will prove different.
	In its submission, the CBI stated that it is a matter of the utmost importance that clause, as presented in the Bill, does not proceed. It said that, at the very least, it should be amended in line with the detailed amendments that I have just described; and that, without these minimum changes, if the clause is not deleted there is a real danger that the UK economy could be seriously damaged. I beg to move.

Lord Sharman: My Lords, my name is attached to this amendment. For the sake of brevity—it is a quarter to 10 at night—I will not repeat all the arguments which the noble Baroness, Lady Noakes, has put forward in support of this group of amendments. However, I support them absolutely.
	In Committee, we discussed the issue of "knowingly or recklessly". I was advised by the Law Society that this did not cover intent. If it does not cover intent, then I am deeply concerned. I therefore believe that, as a minimum, we must have something that does that.
	The noble Baroness referred to probably the best example of something similar, the Sarbanes-Oxley Act, which criminalised the responsibility for executives in signing off on reporting standards. When a chief executive and chief financial officer sign under Section 302 of the Sarbanes-Oxley Act, they do not do so, as is common in this country, for and on behalf of the board of directors. They sign in their personal capacity, and the consequences of being wrong expose them to criminal sanctions. The result has been a huge burden on individual companies to make absolutely darn sure that there is no possible risk that they could be wrong. I correct my former partner by saying that I think her estimates of the increases in audit fees as a result of the Sarbanes-Oxley Act are woefully understated. My understanding is that it is a minimum of 60 per cent, and the current increase is well over 100 per cent You are lucky if you can get away with that.
	We must look long and hard at this offence. If the Government believe that we must criminalise this activity, then can we please ensure that intent is included, and that honest mistakes, through negligence or incompetence, are not caught? I support the amendment.

Lord Sainsbury of Turville: My Lords, I must point out that this has endlessly been the argument. People say with horror in their voices that this will lead to more box-ticking. If it leads to more auditing, that is probably not a bad thing in particular cases. The noble Baroness has constantly been arguing that it will be unproductive work, and the phrase for unproductive work is "box-ticking". That is the argument, as I have understood it. If it is now being said that that is not a problem, then I withdraw that, but I thought that that was the thrust of the argument.
	Let me now turn to the specific amendments, which would narrow the scope of the offences. Amendments Nos. 329 and 331 would change the test of the auditor's mental state from "knowingly and recklessly" to "dishonestly or fraudulently". Amendment No. 330 would change the scope from matter that is "misleading, false or deceptive" to matter that is simply "false or deceptive".
	First, let me discuss "knowingly and recklessly". The purpose of the new offence is not to deal with the auditor who can be proved to have acted dishonestly or fraudulently. As I have just said, there are already many other offences that can be used in such cases, including those in the Fraud Bill currently before your Lordships' House.
	So if we were to change it like that, it would be simply pointless because it would duplicate it.
	It has been suggested that changing to "fraudulently or dishonestly" is the only way of reassuring auditors that they will not be prosecuted for an honest mistake. That is wrong, not because prosecutors would have to prove dishonesty—they would not—but because these offences cannot be committed as a genuine mistake or through negligence. "Recklessness" is a higher hurdle for prosecutors to clear. No accountant will be at risk of prosecution unless he has made a conscious decision not to do what he knows he should do.
	I do not want to seek to define "recklessness" in other terms. "Recklessness" is what we mean, and if there were other words that expressed it better we would use them. In order to make it clearer what we intend by it, let me give you some examples of what we would expect to be covered. As we explained in Grand Committee, an example of recklessness would be an auditor who suspects that if he looked more closely at a particular area of a company's books he would discover a problem and therefore decides not to go further into that area. It will be necessary to establish that the auditor has decided to turn a blind eye for the offence to be proven. If he had merely overlooked the signs of problems through incompetence or laziness, that could be negligence, but he would not be guilty of this new offence.
	A further, more extreme example would be the auditor who simply has a drink with the company's finance director and agrees to sign a clean audit report without seeing the accounts. That is clearly reckless. I am sure noble Lords would agree that it should be punishable, but it may well not be enough to be dishonest or fraudulent. The test of "knowingly or recklessly" in these offences for auditors is in line with the corresponding offence for directors in Section 233 of the Companies Act 1985, and restated in Clause 392, which applies to any director who knew that the accounts did not comply with the Act, or who was reckless as to whether they complied. So we are not singling out auditors. Apparently that is all right for directors; we are putting auditors in the same position.
	The noble Baroness said that no other professional body is subject to this test. I do not think that that is wholly true. There is a special offence for doctors who kill people: the offence of manslaughter by gross negligence was created by the courts, not by legislation, precisely to catch grossly negligent doctors who kill their patients. Again, I think it is wrong to say that this is a unique situation. It is not in any way unique.
	I am not aware that directors live in fear of being prosecuted under the provisions I have mentioned for honest mistakes. I do not see why auditors, other than those tempted to bend the rules, should change their behaviour either as a result of the new offences.
	I hope that I have explained why we do want to use the test of "knowingly and recklessly". Changing it to "dishonestly and fraudulently", as proposed in Amendments Nos. 329 and 331, would render the offence pointless, as it would simply overlap with existing offences.
	Amendment No. 330 would narrow the scope of the offence by excluding "misleading" matter, leaving only "false or deceptive" matter. It has been suggested that "misleading" is too vague a term and that it will make auditors anxious that missing any possible ambiguity or scope for misunderstanding might leave them open to prosecution. The test is not, of course, whether there is anything in the accounts that might be misleading, it is whether the audit report is misleading. I do not see what is unclear in that, or why auditors should find it hard to avoid being misleading "in a material particular".
	There may be occasions where an auditor is tempted to draft a misleading report. If, for instance, he has no choice but to qualify his report because there are real problems with a company's accounts, he may not want to alienate the company directors and he may try to write a report that, while not false (wholly untrue) or deceptive (telling less than the whole truth), gives the impression that the qualification is merely technical. The purpose of these offences is to encourage frank reporting, and so it is right that misleading matter is within their scope.
	I hope that I have explained clearly why we believe that the two phrases "knowingly and recklessly", and "misleading, false or deceptive" are the right ones to use here. If properly understood, these new offences should be of no concern to the overwhelming majority of auditors who would not consider behaving improperly.
	Amendment No. 332 was put forward by my noble friend Lady Goudie. In Grand Committee we debated whether it was appropriate for auditors to be required to check whether a company was keeping adequate accounting records. The general conclusion was that the duty was a sensible one, but that there were particular risks in applying the criminal offence to an auditor's failure to make a statement if a company's records were not adequate.
	The amendment would effectively limit the offence, so that it was applicable only if the accounting records were inadequate to enable good annual accounts to be drawn up. We have some sympathy with that view. We know that some small companies have fairly informal ways of keeping accounting records and that there are difficult judgments to be made about what would be adequate records in the context of a particular company.
	I have explained that the main justification for the offence concerns the importance of reliable financial information to shareholders and markets. That does not apply in the same way to companies' internal record keeping. I therefore agree to consider the amendment, with a view to introducing a government amendment at Third Reading.
	I think that that deals with the CBI's opposition to the new offence for auditors. I am aware of the CBI's briefing and appreciate its concern that the impact of the offence could be to increase the time, money and effort that companies must devote to internal controls over accounting records. Naturally, they look at the impact of the Sarbanes-Oxley legislation in the United States. I note that the CBI's main concern appears to be the impact on the auditor's scrutiny of a company's accounting records.
	That adds weight to the argument made by the noble Baroness, Lady Goudie, that we should distinguish between the auditors' scrutiny of the annual accounts and their scrutiny of the adequacy of a company's internal accounting records. The scrutiny of accounts is based on well established principles, set out in various standards both national and international. The scrutiny of the adequacy of the company's internal books and records is not backed up with standards in the same way. We understand the argument that applying a criminal offence could be a blunt instrument in this area and might have unintended consequences.
	On that basis, and with the assurance that we will consider that point, I hope that noble Lords will not press their amendments.